What Is A Unit Trust Investment & How Do You Make Money From It?

Have you ever eaten at one of those “countries of the world” type restaurants? If you haven’t, this is the basic premise. You get to try out all types of lekker chow, instead of ordering off a normal menu dedicated to one specific cuisine. Rather than going to your local Italian joint for dinner, you get to order a baked Lasagne, but also dish up a little Chinese foo yong and perhaps indulge in some Moroccan cuisine. Unit trusts (they are now called Collective Investment Schemes) are like eating at one of these buffet styled restaurants (although the units themselves aren’t edible and don’t do damage to your waistline 🙂

In simple terms a unit trust investment is when a bunch of investors, who want to invest in different investments like shares, bonds, property & cash, are pooled together.

All the investments made by the unit trust company are divided into individual units among the investors. As the value of the underlying investments go up and down, so do the value of the individual units held by the investors.

Let’s say you had R1,000 a month to invest. Where would you invest it?

Leaving the money in a bank account is a safe option, but you know that they aren’t going to pay you much on your hard-earned bucks, right? You also don’t know enough about the stock market to make an informed decision, and you’ve never heard the term “Bond” before.

This is the predicament many would-be investors face. They want to invest money, but either they don’t have enough money to invest directly into the stock market, or they don’t back themselves to be able to make sound investment decisions.

A unit trust investment solves both of these dilemmas.

What is the benefit of buying Unit Trusts?

You can start with a fairly low monthly contribution (normally R1,000 a month)
The contributions aren’t fixed (you can increase or decrease your contributions)
The fees are low in comparison to endowment policies
You don’t need to make the investment decisions

The last point is key. Unit trust companies, who invest on your behalf, generally create different types of funds for people with different risk appetites.

Let’s get back to the “countries of the world” restaurant to help explain this. Some people visiting the restaurant will be more conservative with their choices. They might play it safe and only try out a few of the options. Other people visiting the buffet are on the other end of the spectrum. They’ve paid their bucks to enjoy everything. Bring on the spice, the heat and the exotic!

People are no different when it comes to investing.

Some people don’t want to risk anything (conservative)
Some people don’t mind losing a little in order to gain a little (moderate)
Some people will take high risks for high rewards (aggressive)

How do you make money with Unit Trusts?

Capital Gain

As the share prices of the companies, you have invested in, rise, your units become more valuable, and you can sell them at a profit. This is known as a capital gain and the one downside is that they’re taxable in your hands.

Dividends

When a company makes a profit, they can either reinvest the profit back into the business or they can declare a dividend. In other words, they pay out the profit to their shareholders. Your unit trust fund manager uses this profit to buy more shares which means you get allocated more units. You might have started out with owning only one unit but over time end up owning ten units because of all the dividends being declared.